A private party cannot commence a proceeding under s. 127 of the Ontario Securities Act (the “Act”) seeking enforcement remedies as a matter of right. In Pearson (Re), 2018 ONSEC 53 the Ontario Securities Commission provides further guidance concerning when it will permit someone other than Enforcement Staff to commence such a proceeding before it.
In Pearson (Re), the Commission refused a motion by a disgruntled minority shareholder of LeadFX Inc. (“LeadFX”), for standing to bring a s. 127 proceeding against that company. Pearson was seeking orders under s. 127, including an order restraining LeadFX from completing a going private transaction without complying with the requirement in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”) to obtain majority of the minority shareholders’ approval.
The application related to an upcoming special meeting of shareholders of LeadFX to consider and approve a going-private transaction to be completed by means of a statutory plan of arrangement under s. 192 of the Canada Business Corporations Act. Pearson alleged LeadFX had structured the going-private transaction to circumvent the need for approval by a majority of the minority, including by entering into a prior transaction that made it possible for LeadFX to rely upon the “90 Per Cent Exemption” from the minority approval requirement contained in s. 4.6(1)(a) of MI 61-101.
Test for Obtaining Standing Under s. 127
The Commission determined that Pearson met most of the factors for obtaining standing to bring a s. 127 proceeding set out in MI Developments (Re), (2009), 32 OSCB 126. The application related to both past and future conduct regulated by Ontario securities law, the application was not, at its core, enforcement in nature, the relief sought was future looking, the Commission had the authority to grant an appropriate remedy, and Pearson was directly affected by the conduct.
However, Pearson failed to persuade the Commission that it was in the public interest for it to hear Pearson’s application for orders under s. 127, a key element of the test for obtaining standing. Pearson was late in bringing the application, had failed to establish a prima facie case that LeadFX had breached MI 61-101, and the Commission was not the appropriate forum for Pearson’s resolving complaints.
The Commission determined that Pearson could, and ought to have commenced the application for relief under s. 127 in a timelier manner following the press release announcing the going private transaction on July 23, 2018. Waiting almost two months after that date was too long, even if the Management Information Circular was not issued until August 10.
According to the Commission, it is necessary to carefully scrutinize the speed with which such applications are brought “to protect reasonable expectations for certainty in corporate transactions that could be inappropriately frustrated through such delays. It is also necessary to avoid incentivizing tactical delays that would affect the ability of the Commission and other parties to adequately prepare during a compressed hearing schedule”.
Existence of a Prima Facie Case
The Commission concluded that Pearson also failed to make out a prima facie case that a scheme had been employed to permit LeadFX to qualify for the 90 Per Cent Exemption without proper disclosure, or “as a result of non bona-fide multipart transactions as an end-run around a requirement of minority shareholder approval”. In particular, there was simply no evidence of a multi-stage scheme to take LeadFX private and force minority shareholders out at the lowest possible price as Pearson alleged, only speculation.
Finally, the Commission was not satisfied that a s. 127 hearing before it was an appropriate forum for resolving Perarson’s complaint about the conduct of LeadFX.
Pearson’s primary complaint was about the price fixed in the Plan of Arrangement. His focus was on recouping at least his original investment. Pearson had other remedies for pursuing his complaints about price, either in the fairness hearing to approve the Plan of Arrangement, in an oppression action, or pursuant to an appraisal remedy under the Canada Business Corporations Act.
In the circumstances, it would be inappropriate for the Commission to exercise its s. 127 jurisdiction to protect investors or the capital markets in the absence of “substantial evidence” that the purpose underlying the 90 Per Cent Exemption had been subverted by LeadFX.
Key Public Interest Take-Aways
Pearson (Re) confirms that the onus is on a private party seeking standing to obtain remedies under s. 127 of the Act to satisfy the criteria set out in MI Developments (Re).
In order to satisfy the Commission that it is in the public interest to grant the request for standing, it will be incumbent upon the party seeking standing to act quickly in bringing the application before the Commission. In addition, it is important that evidence be filed to demonstrate that there is a prima facie case of misconduct justifying a s. 127 remedy, either in the interests of investor protection, or of protection of the capital markets.
Finally, If the dispute is really about money, even if the Commission has jurisdiction to grant a remedy under s. 127, the availability of an appropriate remedy before the courts may incline the Commission to refuse the request for standing.